The outlook for the UK has been covered extensively across the world’s financial media. The list of troubles that the UK faces is extensive. The GBP is down around 16% against the USD this year adding to an already significant cost of living crisis. The UK has had three Prime Ministers in just 2 months, the Russia and Ukraine conflict is on its doorstep and looks like dragging on, energy prices have been surging, and Brexit issues continue to dog the UK years after the ‘deal’ was reached. So, that’s all very negative for the GBP, but how can things can get worse?
Is all the bad news priced in?
It may be. The new UK PM has a significant number of challenges ahead. The first need is to restore financial stability and there is a sense in which Rishi Sunak has already done that. He was a fiscally responsible chancellor and now he is leading the UK. This alone has brought relief for now. The second need is for the new UK PM to balance spending cuts with compassion for those most struggling in the UK. With rising strikes and a battered down National Health Service the UK PM faces ‘difficult decisions’. How he makes them will be key to the outlook for the UK. The reality is though lots of bad news is already priced in with many analysts having been expecting a UK recession from the summer of this year. Also, there are upside risks. If the Russian/Ukraine crisis ends then that could prompt a risk rally.
The FTSE 100 is trading two standard deviations below its 10-year average. It is also trading around 8.7 times the price/earnings ratio which is below the lowest points in 2008 and 2011. Furthermore, valuations have the FTSE 100 trading at a discount of around 20% compared to euro stocks. So, is this now the time to turn bullish on the FTSE 100 ahead of a possible Fed slowdown.